Leisure, Sport and Tourism: Politics, Policy and Planning A.J. Veal Chapter 12 Economic Evaluation

Contents Cost-benefit analysis – projects/plans evaluated on the basis of all benefits and all costs, financial and otherwise Economic impact analysis – effects of a project on the host community, in terms of incomes and jobs

COST-BENEFIT ANALYSIS Measurables and unmeasurables The cost-benefit approach Identifying and measuring costs Identifying and measuring benefits Measuring private benefits - travel cost & other methods (changed order from book) Comparing costs and benefits The value of time Value transfer

Measurables and unmeasurables (Table 12.1) CostsBenefits MeasurableAC Non-measurableBD CBA involves identifying all costs and benefits, and measuring and comparing what can be measured, but not all may be measurable Decision-makers must ultimately decide whether : A-C (measurable net costs) or C-A (measurable net benefits) outweigh the non-measurables, B and D

The cost-benefit approach to project evaluation (Table 12.2) PRIVATE SECTOR Capital cost £’000s (a) Investor5,000 (b) Bank loan5,000 ( c) Total capital (a+b)10,000 Annual expenditure (d) Bank interest (10% of b) 500 (e) Running costs3,500 (f) Total (d+e)4,000 Annual income (g) Sales5,000 Annual profit (h) Profits (g-f)1,000 (i) % return on investor’s capital (100xh/a) 20%

The cost-benefit approach (Table 12.2) PRIVATE SECTORPUBLIC SECTOR Capital cost £’000s Capital cost £’000s (a) Investor5,000 (a) Public agency funds5,000 (b) Bank loan5,000 (b) Borrowings5,000 ( c) Total capital (a+b)10,000 ( c) Total capital (a+b)10,000 Annual expenditure Annual costs (d) Bank interest (10% of b) 500 (d) Capital charges (8% of b)400 (e) Running costs3,500 (e) Running costs3,500 (f) Total (d+e)4,000 (f) Total (d+e)3,900 Annual income (g) Sales5,000 (g) Fees and charges1,500 Annual profitAnnual deficit/subsidy (h) Profits (g-f)1,000 (h) Net cost/loss (g-f)-2,400 (i) % return on investor’s capital (100xh/a) 20% (i) Net social benefits?

Identifying and measuring costs Capital costs – costs of building the facility: upfront and annual Running costs – annual costs of: staffing, materials, heating, lighting, transport, etc. Externalities as costs – see Chapter 5 (see next slide) Opportunity costs – the value of the resource in an alternative use – eg. parkland as housing/offices

Externalities (or ‘third party’ or ‘neighbourhood’ effects) (From Chapter 5) Market under-provides or over-provides, due to specific benefits enjoyed or costs imposed, but not paid for, by specific third parties Negative: costs imposed on third parties – eg. air pollution, noise pollution, congestion Positive: benefits to third parties, which they do not pay for – eg. Environmental/amenity benefits of a golf course to surrounding properties; public tourism attractions

Adelaide Grand Prix study (Table 12.3) Benefits $m Tangible benefits: visitor expenditure* 9.9 Tangible benefits: event costs funded from outside SA * Social benefit: psychic income (general excitement, etc) 28.0 Total benefits * including multiplier effects SA = South Australia Source: Burns et al., 1986

Adelaide Grand Prix study (Table 12.3) Benefits $m Tangible benefits: visitor expenditure* 9.9 Tangible benefits: event costs funded from outside SA * Social benefit: psychic income (general excitement, etc) 28.0 Total benefits Costs Tangible costs: event + capital costs funded from SA sources Social costs: traffic congestion 6.2 Social costs: property damage 0.03 Social costs: accidents Total costs Benefit:cost ratio 2.7 – 3.2 * including multiplier effects SA = South Australia Source: Burns et al., 1986

Adelaide Grand Prix study: Psychic income calculation 20% of population experienced extra travel costs due to congestion/diversions during the Grand Prix Total extra travel costs: $6.2m Proportion of the above who were still in favour of hosting the Grand Prix: 90% Total extra travel costs of the 90%: $5.6 m Psychic value of Grand prix for this group (20% of popn): at least $5.6m. Psychic value of Grand Prix for whole population: (5 x 5.6m) $28m

Traffic congestion costs (Table 12.4) Source a. No. of vehicles experiencing delays Survey 1,000,000 b. Average increase in journey time Survey 0.25 hrs c. Aggregate delay time a x b 250,000 hrs d. Value of time per hour Avge wage £8.00 e. Value of time lost c x d £2,000,000 f. Average fuel costs/vehicle /hour Motoring org. £2.00 g. Aggregate fuel costs of congestion c x f £500,000 h. Total costs of congestion e + g £2,500,000 Hypothetical data

Identifying and measuring benefits Public goods (non-rival & non-excludable – see Ch. 5): – General public valuation can be measured using willingness-to-pay method (see below) Externalities as benefits – eg. publicly maintained amenity (eg. harbour, historic monument) generates tourism income for business, which can be measured. Merit goods – ‘merit’ determined by experts, but could be endorsed by the public and measured as in public goods Option demand – Preserving the option of using the facility/service – measured as for public goods Mixed goods/services – Some public good dimensions, some private

Mixed goods/services (Table 12.5) ExamplesPublic good & other social benefitsPrivate benefits Performing ArtsCultural spin-off to community. Tourist attraction and economic benefits. Enjoyment of performance by audience.

Mixed goods/services (Table 12.5) ExamplesPublic good & other social benefitsPrivate benefits Performing ArtsCultural spin-off to community. Tourist attraction and economic benefits. Enjoyment of performance by audience. Urban ParksAmenity for local properties and passers-by; pollution dispersal Enjoyment of the park by users.

Mixed goods/services (Table 12.5) ExamplesPublic good & other social benefitsPrivate benefits Performing ArtsCultural spin-off to community. Tourist attraction and economic benefits. Enjoyment of performance by audience. Urban ParksAmenity for local properties and passers-by; pollution dispersal Enjoyment of the park by users. National ParksMerit good, option demand, vicarious enjoyment, amenity for properties and passers-by. Enjoyment of the park Sports facilitiesHealth effects reduce public or insur- ance health costs. Public enjoyment of national sporting success. Enjoyment of particip- ation.Health benefit to participants.

Mixed goods/services (Table 12.5) ExamplesPublic good & other social benefitsPrivate benefits Performing ArtsCultural spin-off to community. Tourist attraction and economic benefits. Enjoyment of performance by audience. Urban ParksAmenity for local properties and passers-by; pollution dispersal Enjoyment of the park by users. National ParksMerit good, option demand, vicarious enjoyment, amenity for properties and passers-by. Enjoyment of the park Sports facilitiesHealth effects reduce public or insur- ance health costs. Public enjoyment of national sporting success. Enjoyment of particip- ation.Health benefit to participants. Youth facilitiesReduction of anti-social behaviour.Enjoyment of facilities Facilities for elderly Physical and mental health effects reduce public or insurance health costs. Enjoyment of facilities by users. Health benefit to users.

Measuring private benefits: travel cost & other methods Willingness-to-pay or ‘contingent’ method Travel cost or Clawson method Switching values

Willingness-to-pay or ‘contingency method Users of free public facilities are asked what they would be willing to pay Possibility that respondents will: – under-state, just in case there is a plan to introduce charges – over-state to ensure support for the facility

Travel cost or Clawson method Based on: – the observation that less people use a facilty as travel costs increase – deriving a classic demand curve (price versus quantity) – measurement of consumer surplus

The idea of demand curve/consumer surplus: data GroupNumber of customers Price range would have paid Price actually paid Average price would have paid Difference (d-b) Consumer surplus acbde(a x e) (n)(£) A B C D Totals E Plot data on a graph

Consumer surplus (Fig. 12.2) Price charged

Travel cost/Clawson method: site/travel zones A Site CDB

Travel cost/Clawson method: data Source of information ZoneTotal A BCD a. Travel costs £/headSurvey£5£10£15£20 b. Total visits to site p.a.Survey/counts40,00060,00025, ,000 c. Zone populationCensus20,00040,00050,00060,000170,000 d. Visit rate/1000 popnCalculated (b/c) Plot on a graph

Travel cost/Clawson method: Costs vs visit rates Fig. 12.4

Info. source Zone A Zone B Zone C Visits a. Pop’n '000sCensus Entry charge nil - actual situation, as in Table b. Total cost (£)Survey c. Total visitsSurvey/counts40,00060,00025,000125,000 d. Visit rate*c/a Travel cost analysis (Table 12.10)

Info. source Zone A Zone B Zone C Visits a. Pop’n '000sCensus Entry charge nil - actual situation, as in Table b. Total cost (£)Survey c. Total visitsSurvey/counts40,00060,00025,000125,000 d. Visit rate*c/a Hypothetical entry charge £5 e. Total cost (£)b f. Visit rate*d g. Estimated visitsf x a30,00020,000050,000 Travel cost analysis (Table 12.10) Visit rates from Fig. 12.4

Info. source Zone A Zone B Zone C Visits a. Pop’n '000sCensus Entry charge nil - actual situation, as in Table b. Total cost (£)Survey c. Total visitsSurvey/counts40,00060,00025,000125,000 d. Visit rate*c/a Hypothetical entry charge £5 e. Total cost (£)b f. Visit rate*d g. Estimated visitsf x a30,00020,000050,000 Hypothetical entry charge £10 h. Total cost (£)b i. Visit rate*d50000 j. Estimated visitsi x a10,00000 Hypothetical entry charge £15 k. Total cost (£)b l. Visit rate*d000 m. Estimated visitsl x a0000 Travel cost analysis (Table 12.10) Visit rates from Fig. 12.4

Price/visit demand schedule & consumer surplus Entry priceTotal estimated visits (demand) Price range would pay (£) Visits added at this price range Average price would be prepared to pay (£) Consumer surplus (£) 0125, , ,000 £550, , ,000 £1010, , ,000 £ Total 612,500 Table 12.11

Switching values Decision-makers decide whether £2 subsidy is acceptable Annual cost of project £3 million Annual income £2.2 million Net annual costs £800,000 No. of annual visits400,000 Cost per visit/switching value £2 Minimum value of benefits if project is to go ahead (Table example)

Value of time Some benefits of projects are time savings This can apply to leisure projects (eg. new tourist route), so savings are of leisure time How is leisure time valued? Research indicates people’s preparedness to pay money to save their own leisure time and the value they place on it Equity issue: should the leisure time of poorer people be valued at less than that of wealthy people?

Comparing costs and benefits (Table 12.6) Cash assessment Costs£'000 p.a. Capital charges400 Opportunity costs- Running costs3500 Externalities- Total costs3900 Benefits Private/user benefits paid for1500 Private/user benefits not paid for- Non-user benefits- Total benefits1500 Surplus/deficit-2400

Comparing costs and benefits (Table 12.6) Cash assessment Cost-benefit analysis Costs£'000 p.a. Capital charges400 Opportunity costs-300 Running costs3500 Externalities-450 Total costs Benefits Private/user benefits paid for1500 Private/user benefits not paid for-1000 Non-user benefits-2500 Total benefits Surplus/deficit

The life of a project Costs & benefits spread over the life of a project – eg., for a building: 50+ years? Costs/benefits variable over time & between projects All costs/benefits valued in current terms by means of discount rate (opposite of interest rate) Examples:

Life of a project: 2 projects compared (Fig. 12.1)

Project AProject B YearCosts (£m) Benefits (£m) Net benefits (£m) Costs (£m) Benefits (£m) Net benefits (£m) Total NPV* Two projects compared: Net Present Value (Table 12.7) * Calculations not shown

Value transfer The idea of using generic value rather than conducting fully-researched cost-benefit studies for every project See US Forest Service project : – Rosenberger and Loomis (2001) –

ECONOMIC IMPACT ANALYSIS Introduction Counting the cost The multiplier Economic significance studies

Introduction to economic impact studies Concentrates on income and jobs May be undertaken: before initiating a project, as aid to decision-making after completion of project, as part of evaluation after a single event, to persuade funders to support future events in relation to industry sectors – economic significance studies

Counting the cost Importance of defining the study area – eg. Country, region/state, county/sub-region, local government area/city Impact is created by money spent in the study area by: – visitors (‘tourism multiplier’) – external investors – higher levels of government

The multiplier Money spent in an area by visitors, investors or higher levels of government circulates, creating further impacts Therefore, if £1 initial expenditure eventually creates £2 of income, the multiplier is 2 This can be calculated

Estimating the multiplier: data requirements Average proportion of firms’ expenditure: a)goes to other local firms b)goes to local residents as wages/salaries c)leaves the area (eg. taxes, imports, profits) = ‘leakage’ Discovered by industry survey, eg. a)25% to local firms b)40% to local residents c)35% leaks Average proportion of residents’ expenditure spent a. locally, b. outside the area (leakage) Discovered by resident survey, eg. a)50% to local firms b)50% leaks

Multiplier calculations: diagram (Fig. 12.5) RoundLeaks Local firmsIndividuals $ = Initial cost $1000 $46.25$ $250 $52.50 $ % 25% 40% $400 $ = $100$ $200 50% $ = $105$ $50 Etc

Multiplier calculations contd Each round produces a smaller impact because of leaks Fig shows Round 14/15 producing local impacts of <$1 Aggregate impacts: – Business turnover: $ – Resident incomes: $ Various multipliers: – Business turnover multiplier: /1000 = 1.82 – Orthodox income multiplier: /400 = 1.82 – Unorthodox income multiplier: /1000 = 0.73 Different inputs regarding firms’ and individuals’ expenditure ratios affect the size of multipliers – spreadsheet version on website (Webfile 12.1)

Economic significance studies Studies which demonstrate the economic significance of industry sectors, eg. leisure, sport, the arts, tourism References to examples given in the book